Petrobras, as Brazil’s state-run oil producer is known,
raised a 2013-2016 cost-saving target to 37.5 billion reais
($16.9 billion) from 32 billion reais, the Rio de Janeiro-based
company said in a May 9 statement accompanying first-quarter
results, which included a 30 percent drop in net income.

Chief Executive Officer Maria das Gracas Foster is
attempting to counter operational losses at the company’s
refining and distribution unit of about $40 billion since 2011
when President Dilma Rousseff started using Petrobras to
subsidize fuel imports to rein in inflation. Foster has sought
to close the gap between domestic and foreign prices, while
cutting operating expenses and increasing production.

“The company has the ability to recover profitability and
its market value over the course of 2014, mainly through
efficiency gains and increasing operational capacity,” Nataniel
Cezimbra, an analyst at Banco do Brasil SA, said in a research
report after the results were released.

Petrobras rose 1.5 percent to 17.93 reais at 10:13 a.m. in
Sao Paulo. The stock lost 13 percent in the past year before
today, the worst performance among 15 global peers tracked by
Bloomberg, which had an average gain of 15 percent. Trading at
8.57 times estimated earnings, Petrobras is the group’s cheapest
stock.

Quarterly Profit

First-quarter net income declined to 5.39 billion reais
($2.28 billion), or 41 centavos a share, from 7.69 billion
reais, or 59 centavos, a year earlier. The average per-share
estimate of 13 analysts tracked by Bloomberg was 42 centavos.

Fuel imports rose 13 percent from a year earlier,
generating a first-quarter loss for the refining unit of 7.4
billion reais. Profit at its gas unit slumped 41 percent.

Price caps require imported gasoline and diesel to be sold
at a loss to domestic distributors. President Rousseff is
seeking to keep prices in check ahead of October elections.
Increases of 4 percent for gasoline and 8 percent for diesel
that took effect Dec. 2 were the first in nine months.

Petrobras’s cash flow will improve after it starts a new
refinery later this year, Foster said in the statement. The
company will also “gradually” adjust domestic prices to
international benchmarks, she said.

“It will be very difficult to have an adjustment in an
election year,” Luana Helsinger, an oil and gas analyst at
brokerage GBM Brasil, who has the equivalent of a buy rating on
the stock, said by telephone from Rio.

Only Refiner

Petrobras, the only gasoline and diesel producer in Brazil,
ran its 11 crude refineries at an average 96 percent of capacity
during the quarter in an attempt to lower reliance on imports.
The over-stretching of workers and machinery was one of the
reasons behind fires at two plants in December and January,
according to the country’s oil workers union.

Petrobras said May 5 that it expects 13 billion reais in
savings through 2018 with a voluntary dismissal program.

Petrobras’s debt of more than $100 billion is the highest
of any publicly traded oil company, data compiled by Bloomberg
show. That compares with about $82 billion at PetroChina Co. and
about $66 billion at Russia’s OAO Rosneft, the two most indebted
crude producers after Petrobras.

A fourfold increase in the obligations in five years
prompted Moody’s Investors Service to cut its rating on
Petrobras’s debt by one level last year to Baa1, the third-lowest investment grade.

Pre-salt Target

The company is investing $221 billion in the five years
through 2018 as it develops deposits trapped beneath a salt
layer miles below the Atlantic Ocean’s floor in deep waters off
Brazil’s southeastern coast.

Given the financial needs to develop the so-called pre-salt
reserves, borrowing costs will remain at record levels, said
Carlos Gribel, vice president for emerging markets at INTL
FCStone Securities in Miami.

Higher debt is coupled with the company’s expectation that
it won’t generate positive net cash flow this year. Petrobras
has posted about $40 billion in operational losses at its
refining and distribution unit since it started subsidizing fuel
imports in 2011.

“Based on the decisions of the Brazilian federal
government, as our controlling shareholder, we have, and may
continue to have, periods during which our product prices will
not be at parity with international product prices,” The
company said in an April 30 regulatory filing.

Policy Outlook

Petrobras plans to boost domestic crude output 7.5 percent
this year as it connects wells to production equipment in deep
waters of the Atlantic. A combination of equipment delivery
delays, unplanned maintenance at offshore platforms and faster-than-expected declines at the company’s legacy fields in the
Campos Basin has left production almost flat since 2010.

“It’s not like they’re still wildcatting, trying to find
the resource, they just need to bring that online,” Chris
Kettenmann, an analyst at Prime Executions Inc., said in a
telephone interview from New York. “The policy situation in my
mind can only improve. How much worse can it really get?”